Wealth fund an unproductive idea

It makes no sense to set up a sovereign wealth fund to make future generations of Australians wealthier at the expense of the present generation. Even without the mining boom, it is highly likely that future generations would be wealthier than the present one.

But cutting back on public investment today to create a giant nest egg for a “rainy day" 30 years from now will only damage the nation’s growth potential. It is much better to make both current and future generations wealthier by continuous public and private investment.

Once the budget is in surplus, the calls to set up a sovereign wealth fund are likely to intensify. Proponents argue that this would stop the proceeds of the latest resources boom being “frittered away". The basic idea is to use annual surpluses to buy and sell financial assets and lock away the accumulating balances for decades.

A common suggestion is draw on the fund when the mining boom collapses. Although the Gillard government does not propose setting up its own sovereign wealth fund, it supports the existing version, the Future Fund. This can’t be touched until after 2020, when its sole role will be provide a different way of funding pensions for a dwindling band of public servants in superannuation schemes that were shut down years ago.

Westpac chairman
Ted Evans
is one of the most persuasive critics of sovereign wealth funds. A former Treasury head, Evans told this columnist last week that he has not changed his view that the greatest contribution governments can make to the living standards of future generations is to ensure that today’s policies are directed towards maximising future production.

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He argues that one effective way to do this is to spend more on education, which he says “can yield a higher return than even good private investments". Evans sees no point in a future government having ample funds to pay the pensions of former public servants but a shortage of funds to pay for age pensions or other high priority spending.

Despite the government actuary’s conclusion that there was no difficulty in relying on future budget revenue to pay for the shrinking cost of public service pensions after 2020, the former Coalition treasurer,
Peter Costello
made taxpayers contribute to the Future Fund. Fortunately, he did not demand that today’s taxpayers also contribute to a special fund to cover the costs of the age pension, defence and family benefits after 2020.

Apart from paying for contributions to their own superannuation, present day taxpayers have to fund the public service contributions to the new accumulation schemes on top of the payments they’ve made into the Future Fund. The money in this fund will do almost nothing to boost productivity, yet it could do a lot if it were not locked away to deal with a non-problem after 2020.

The Gillard government is right not to start a new sovereign wealth fund. Instead, it should divert the income and capital from the Future Fund to measures to improve productivity.

The government could park future budget surpluses in short term funds to smooth out capital spending in higher education and health, as it did before the global financial crisis. Often, however, the most productive spending in education or health is not on physical infrastructure. Labour intensive remedial reading and mental health programs can do more than a lavish new “great hall" for graduation ceremonies or a fancy hospital foyer.

Assistant Treasurer
Bill Shorten
recently claimed that compulsory superannuation removes the need for a sovereign wealth fund. Both types of funds can play a part in capital formation by taking up new issues of shares and corporate bonds, but the majority of their activities involve trading existing financial assets, which is not the same as investment in new productive capacity.

Nor can private capital supply all the required investment in areas that Evans highlights, such as education and research and development. Putting a much bigger effort into these activities across a wide range of disciplines should help create a diversified industrial base that is less dependent on mining. In contrast, diverting billion of dollars into funding tax concessions for additional contributions to superannuation, or a new sovereign wealth fund, will do little to enhance productivity. Treasury estimates that the planned increase in compulsory super contributions from 9 per cent of salaries to 12 per cent will generate a pathetic net increase in national savings of 0.4 per cent by 2035, well below the growth of bank deposits last year without any tax concessions.

Gillard indicated on Wednesday that she will spend more to help the unemployed become “job ready". This is welcome, even if it increases output rather than productivity. But far reaching budget cuts would free up funds to improve education, scientific research, transport infrastructure and the tax system. The projected $38 billion cost of the tax concessions for superannuation in 2013-14 presents the best opportunity to cut budget subsidies for middle and upper class welfare. But there is plenty of scope for other cuts to the overall $140 billion in total projected tax expenditures in 2013-14.

Full cost recovery of public spending on irrigation, endorsed by state and federal governments since 1994, would save $6 billion on licence buy-backs and engineering works. Cutting subsidies to fossil fuels could save up to $10 billion a year and cut emissions. The ill-managed and profligate Defence Department should no longer be exempt from the overall cap on spending. Junking the proposed local construction of 12 giant submarines to a unique Australian design would save $40 billion and let 12 proven, high performance German subs be imported for $5 billion. A big slice of the savings could go to one of the nation’s best defence assets — a well educated population capable of maintaining a technological edge in the region. None should go to a sovereign wealth fund.